Lawyers in the Shadows: The Transactional Lawyer in a World of Shadow Banking

By Steven L. Schwarcz | 63 Am. U. L. Rev. 157 (2013)

This article examines how the role of transactional lawyers should change in the new world of shadow banking. Although transactional lawyers should consider the potential systemic consequences of their client’s actions, their actions should be tempered by their primary duties to the client and by their responsibilities to the legal system more broadly.

The financial world has been rapidly changing, and disintermediation is a key feature of that change. “Disintermediation” refers to bypassing the need for bank intermediation between the sources of funds, essentially the capital and other financial markets, and firms that use those funds to operate in the real economy. By bypassing banks, firms avoid the profit markup that banks charge on loans.

The disintermediated financial system is often referred to more colloquially as “shadow banking.” Shadow banking’s funding already rivals that of bank-intermediated credit for households and businesses. The size of the worldwide shadow banking system was estimated to be $67 trillion in 2011.

By reducing the dominance of banks as financial intermediaries, shadow banking has so transformed the financial system that transactional lawyers—especially those accustomed to dealing with banks and bank lending—are facing an array of novel issues. This article focuses on one of those issues: to what extent should transactional lawyers address the potential systemic consequences of a client’s actions?